Dollar stays strong despite sliding Treasury yields

Dollar stands tall even as long-dated yields extend slide

The dollar continued gaining ground against most of its major peers on Thursday, breaking back above the 151 level against the yen and adding to the risks of intervention, even as a former BoJ official said he thinks the Bank should end its negative interest rate policy as soon as in January, and even after Governor Ueda said yesterday that they don’t need to wait until inflation-adjusted wage growth turns positive before ending their ultra-loose policy.

Dollar traders may have decided to stick to their long positions initiated after several Fed officials left the door open to higher interest rates, as Chair Powell did not comment on monetary policy in the speech he delivered yesterday. Powell is scheduled to speak today as well at a panel discussion on “Monetary challenges in the global economy.” There may be more chances to make a reference to interest rates today and if so, it will be interesting to see how the dollar and other markets that are sensitive to the Fed’s actions and plans will respond.

The 10-year Treasury yield continued to slide yesterday, despite the dollar continuing to perform well. On top of that, the market’s implied rate path derived by Fed funds futures continues to suggest a slim probability of another hike and around 90bps worth of rate cuts by the end of next year.

Maybe market participants expect the economy to weaken going forward, and indeed, the Atlanta Fed GDPNow model estimates a 2.1% annualized growth rate for Q4, but with such high interest rates and a stellar acceleration to 4.9% in Q3, this appears more than normal.

Currently, there is nothing justifying so many basis points worth of rate reductions and thus, should growth-related data continue to point to a US economy that is outperforming its major peers, investors may start lifting their implied path and thereby add further fuel to the dollar’s engines. For the dollar to reverse its course and enter a downtrend, a streak of disappointing data may be needed.

China’s property sector is back in the spotlight

On Wall Street, although the Dow Jones slid somewhat, the S&P 500 and the rate-sensitive Nasdaq slightly extended their gains, perhaps aided by the further retreat in long-dated yields. However, during the Asian session today, sentiment deteriorated as the spotlight turned back to China’s troubled property sector.

On Wednesday, a Reuters report said that Ping An Insurance will take over Country Garden Holdings and assume its debts, but a spokesperson for the insurance firm denied the report today. Hong Kong’s Hang Seng reversed earlier gains and closed in the red, while the Hang Seng Mainland Properties Index fell almost 3%.

On top of that, China’s inflation numbers showed that the CPI fell 0.2% y/y and the PPI was down 2.6%, which following the accelerating contraction in Chinese exports on Tuesday, adds to the dim outlook of the world’s second largest economy.

Demand concerns weigh on oil, gold slips

Oil prices extended their tumble yesterday as concerns about weak demand from China have been weighing on them lately, with the market clearly less worried now about the Middle East conflict.  There are also indications of weak demand from the US, with the American Petroleum Institute (API) reporting a 11.9mn inventory build for last week. If confirmed by the Energy Information Administration (EIA), this would be the biggest build since February. That said, this will not be known until November 15, as the EIA has delayed its release due to a system upgrade.

Gold also edged south yesterday as the Middle East risk premium appears to be fading. On top of that, considering the opposite directions in the dollar and yields lately, the precious metal seems to be driven more by the recovery in the greenback. Therefore, should the dollar stay strong for a while longer, gold could stay under selling pressure.